GM Building sale may calm property investor nerves

By Ilaina Jonas

NEW YORK, May 28 (Reuters) - The U.S. commercial real estate market should be relieved by the sale of New York's GM Building, signaling that tight credit markets and fewer buyers may make deals difficult but do not spell doom for the sector, real estate research firm Reis said on Wednesday.

Boston Properties Inc (BXP.N) said on Saturday it would join one or more financial partners to buy the General Motors Building and three other Manhattan skyscrapers for about $4 billion. The $2.8 billion price for the 2 million-square-foot (186,000-square-meter) GM Building is a record for a U.S. office building, and twice what Harry Macklowe paid in 2003.

Boston Property will ultimately own 49 percent of the GM Building and tax agreements restrict the sale of the property for up to nine years, the company said in a regulatory filing on Wednesday. The GM Building sale is set to close in July.

The price represents about a 16 percent annual compound appreciation for Macklowe, and translates into a 4.6 percent first-year yield for the new buyers, Reis said.

Macklowe was forced to sell the highly desirable property to repay loans on seven other properties he bought last year. The sale cannot be translated into a direct outlook for most of the U.S. office market, as the building is unique, Reis said.

"(But) the capacity of the market and its participants to reach this deal in spite of current credit condition will have a modestly restorative impact on confidence levels and overall transaction activity in the largest office market," Reis Chief Economist Sam Chandan said on a conference call.

The deal follows a subdued first quarter, when U.S. sales of office, retail, industrial and apartment buildings totaled $42.6 billion, down 40 percent from the year-earlier quarter.

Tight credit and the end of ever-increasing valuations have driven out buyers. Plus, the commercial mortgage-backed securities market, which helped finance many property portfolio deals in the past several years, has slowed to a trickle. Reis predicts new CMBS issues will be between $32 billion and $35 billion in 2008, down from $230 billion in 2007.

The CMBS market may not return as a "significant source of capital for investment" until 2009, Reis said.

The commercial market is also likely to see defaults creep up this year as owners who borrowed money with interest-only loans seek to refinance their loans, and face a softer market when they need to borrow money to cover the principal.

Reis believes some office sector loans made in the frothy period of 2005 to 2007 had projected cash flow up to 10 percent higher than actually realized, meaning some are now at risk.

In the first quarter, the average price per apartment unit fell to $95,000 from $110,000 in third quarter of 2007, the top of the market. The yield or capitalization rate, which moves in the opposite direction as price, has inched up to 5.7 percent in the first quarter from 5.4 percent in the third quarter.

In the office sector, prices have fallen about 9.9 percent to $250 per square foot from a high of $270 in the fourth quarter of 2007. Cap rates climbed to 6.2 percent in first quarter from a low of 5.4 percent in the second quarter 2007.

In retail property, investors have been attracted to only top-quality property in the most populated spots. That has narrowed the average price to about $176 per square foot from a high of about $181 in the second and third quarters of 2007. Cap rates were 7.3 percent, nearly flat with a year before.

For warehouse and distribution centers, large gains in exports helped keep prices per square foot at about $76, down from about $77 the prior year. (Editing by Braden Reddall)